Investment Update Saudi Arabia Saudi Basic Industries Corporation SABIC Tickers: 2010.SE (Reuters) SABIC AB (Bloomberg) Listing: Saudi Stock Exchange (Tadawul) Fair Value: SR83.1 CMP: SR80.5 (as on Nov. 22 nd, 2009) HOLD Investment Summary We believe that product prices and overall capacity utilization were the key factors for Saudi Basic Industries Corporation (SABIC) profitability growth during 2Q2009 and 3Q2009. However, on a 9M2009 basis the prices and capacity utilization are still low compared to the previous year as the financial crisis which started in 4Q2008 stretched into 1H2009 eroding oil prices and end-product demand. The company reported after tax profit of SR3.6bn in 3Q2009, a growth of 102.1% over the previous quarter but a decline of 49.6% over the corresponding period last year. During 9M2009 tax after profit declined by 79.3% from SR21.7bn recorded in 9M2008. In view of the rise in oil prices in 3Q2009, we have changed our forecast for crude oil prices from US$60.0-65.0 per barrel to US$70.0-80.0 per barrel for the period 2009-12. Consequently, we have also raised our forecast for petrochemical prices. Faisal Hasan, CFA Head of Research fhasan@global.com.kw Phone No:(965) 22951270 Syed Taimure Akhtar Financial Analyst sakhtar@globalinv.com.sa Phone No:(966) 1 2199966 Ext.: 950 Umar Faruqui Financial Analyst ufaruqui@global.com.kw Phone No:(965) 22951270 Going forward, we believe that the company capacity utilization will grow modestly to reach 77.0%-82.0% in 2012 compared to 60.0%-65.0% in 2009 due to an expected slow pace of economic recovery. Despite the uncertain economic environment, SABIC is consistently expanding its operational and production activities. Recently, SABIC announced two JVs with SINOPEC and Albemarle Corporation. SINOPEC will have a production capacity of 3.2mn tons of different petrochemical products and is expected to come on line in 1Q2010. Albemarle Corporation will have a production capacity of 6,000 tons of tri-ethylene aluminum (TEA), and is expected to come online in 2012. JV with SINOPEC is likely to give SABIC the ability overcome entry barriers and deal with competition effectively in the Chinese market. In addition, tie-up with a local producer will give the company the necessary support and knowledge to sail smoothly in the high growth Chinese market. The Chinese JV will increase the overall capacity of the company by 2.8%. Saudi Basic Industries Corporation 1
Long-term sustainable volumetric growth is largely associated with the revival in the world s major economies, which are the major consumers of SABIC products. The stimulus measures in various countries have managed to jump-start the economies. However, so far the recovery has been jobless with unemployment still at historically high levels in many countries. Eventually private sector spending and consumer spending will have to overtake government spending to make economic growth sustainable. Thus, we are assuming a slow economic recovery. After incorporating all the recent updates in our financial model we have revised our fair value upwards to SR83.1. The stock at its current market price of SR80.5 (as on 22nd Nov 09) is trading at a discount of 3.2% to the fair value. We, therefore, recommend HOLD for the stock. Table 01: Investment Indicators Market Price Shares in issue Market Cap 52-week price range (SR) (mn) (SR mn) (SR) High / Low 80.50* 3,000 241,500 84.7 / 34.1 Revenues Net Profit EPS BVPS* ROE P/E* P/BV* Year (SR mn) (SR mn) (SR) (SR) (%) (x) (x) 2010E 129,738 18,183 6.1 41.3 15.7 13.3 1.9 2009E 99,561 7,619 2.5 35.8 7.2 31.7 2.2 2008A 150,810 22,030 7.3 34.3 22.7 7.1 1.5 2007A 126,204 27,022 9.0 36.5 32.9 14.7 3.6 Source: Annual Reports and Global Research *Historical P/E & P/BV multiples pertain to respective year -end prices, while those for future years are based on closing prices on the Tadawul as of November 22nd 2009. Chart 01: Share Price Performance Chart 11,000 175 10,000 155 9,000 135 8,000 115 7,000 95 6,000 75 5,000 55 4,000 35 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 TASI - LHS SABIC(SR) - RHS Source: Zawya & Saudi Stock Exchange (Tadawul) 2 Saudi Basic Industries Corporation
GCC Petrochemical & Fertilizer Sector Based on given data and our understanding, regional capacities reached 63.1mn tons by the end of 2008 and are further forecasted to reach at 73.5mn tons by the end of 2009. In CAGR terms, the regional capacity is expected to grow at 9.1% during 2009-12 to 89.4mn tons. It is worth mentioning that the forecasted growth in the regional capacity is based on timely completion of expansion plans. Chart 02: Regional Petrochemical Capacity Growth (mn ton) 100.0 4.5% 4.5% 90.0 11.4% 80.0 16.5% 70.0 9.6% 0.1% 60.0 50.0 40.0 30.0 20.0 10.0-2007 2008 2009E 2010E 2011E 2012E Total Petrochemical Capacities Growth Source: Zawya & Global Research 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% The regional fertilizer capacity is expected to increase at a 2008-12 CAGR of 24.0% to 31.6mn. The capacity includes all types of fertilizers. The major growth in regional fertilizer capacity is expected to take place in Saudi Arabia where it is expected to increase at a CAGR of 31.2% to 20.1mn tons. In turn, the major portion of growth in domestic fertilizer capacity is attributable to the upcoming capacity in Maaden Complex, which has a capacity to produce 10.0mn tons of different fertilizer products and SABIC has a 30.0% stake. Chart 03: Growth in Regional Fertilizer Capacity (mn ton) 35.0 4.7% 27.4% 30.0 38.5% 25.0 20.0 28.2% 15.0 10.0 5.0 0.0 2007 2008 2009E 2010E 2011E 2012E Total Fertilizer Capacities Growth Source: Zawya & Global Research 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% Saudi Basic Industries Corporation 3
Table 02: GCC Petrochemical Capacity Expansion Plan (tons) Cost US$ Basic- Basic- Basic- Expected Project Names Country (mn) Olefins Aromatic Oxygenate Completion OSOS Petrochemical Project Saudi Arabia 1,000 - - - 2010 Sino-Saudi Petrochemical Project Saudi Arabia 5,000 1,700,000 - - 2010 Saudi Kayan Saudi Arabia 10,000 3,800,000 - - 3Q2010 SIPCHEM-Olefins Saudi Arabia 7,000 2,100,000 - - 3Q2012 Safra Yanbu Phase II Aromatics Expansion Saudi Arabia 400 - - - 2009 SIPCO-Yanbu Linear Alkyl Benzene (LAB) Plant Saudi Arabia - - - - 2010 Petrokemya-PVC and Offsite Saudi Arabia - - - - 2010 Sadaf-Styrene Plant-Saudi Petrochemical Saudi Arabia 600-600,000-2010 Dammam 7 - Butanol Plant Saudi Arabia 400 - - - 2010 Delta Oil Saudi Arabia 2,000 1,200,000 - - 2009 Arabian Chlor Vinyl Company Saudi Arabia 400 - - - 1Q2010 Saudi Polyolefin Company - SPC Saudi Arabia 560 - - - 2009 Sahara - Jubail Acrylic Complex Saudi Arabia - - - - 4Q2010 Al Rajhi - Jubail Complex Saudi Arabia 4,000 - - - 2011 Gulf Petrochemical Industries Company Bahrain 200 - - 1,728,000 2010 KFH - Petrochemical, Water, and Power Bahrain 1,500 - - - 2010 IBK - PTA/PET Complex Kuwait 300 - - - 2010 Salalah Methanol Plant Oman 900 - - 1,080,000 2Q2010 QAPCO Qatar 410 - - - 2Q2012 QP/Shell Qatar 2,500 1,500,000 - - 2011 QH/Honam - Qatar Petrochemical Complex Qatar 2,600 880,000 600,000-2012 QP/Exxon Mobil - Ras Laffin Petrochemical Qatar 3,000 1,300,000 - - 2012 QAFAC II - Ammonia & Methanol Complex Qatar - - - - 1Q2010 Borogue 2 UAE 5,500 39,000 - - 2Q2010 Borogue 3 UAE - - - - 2014 Takreer - Ruwais Gasoline and Aromatics UAE 1,000-600,000-2010 KGL Petroleum UAE 2,000 - - - 2013 Total 52,122 12,519,000 1,800,000 2,808,000 Source: Zawya & Global Research Table 03: GCC Fertilizer Capacity Expansion Plan (tons) Cost US$ Expected Project Name Country (mn) DAP Ammonia Urea Completion Maaden Saudi Arabia 7,010 2,900,000 1,100,000-1Q2010 SIPCHEM Saudi Arabia - - 648,000-3Q2012 SAFCO-V Saudi Arabia 500-1,200,000 1,500,000 2Q2011 Ruwai UAE 1,500-720,000 1,260,000 3Q2011 Oman India Oman 1,000 - - 1,700,000 3Q2011 QAFAC II Qatar 400-360,000-1Q2010 QAFCO V Qatar 3,200-1,656,000 1,386,000 1Q2011 Total 13,727 2,900,000 5,684,000 6,087,200 Source: Global Research & Zawya 4 Saudi Basic Industries Corporation
Regional Capacity Utilization Based on our regional coverage, we expect regional average capacity utilization to improve slightly to 50.0%-60.0% during 4Q2009 as compared to the calculated utilization rate of 50.0%-55.0% during 3Q2009. On a yearly basis the 2009 regional petrochemical capacity (excluding fertilizer) is expected to average 57.0%-62.0%. Going forward, we expect a slow improvement in regional capacity utilization to reach 75.0%-85.0% by the end of 2012. Chart 04: Regional Petrochemical Capacity Utilization 85.0% 80.0% 75.0% 70.0% 65.0% 60.0% 55.0% 50.0% 2008 2009E 2010E 2011E 2012E Capacity Utilization - Petrochemical Capacity Utilization - Fertilizer Source: Global Research & Company Reports 100.0% 97.5% 95.0% 92.5% 90.0% 87.5% 85.0% On the other hand, the average regional fertilizer capacity is expected to remain in the range of 80.0%-90.5% during 4Q-2009 as compared to our calculated utilization rate of 80.0%- 85.0% during 3Q2009. For the whole 2009 the utilization rate is expected to end up in the range of 85.0%-90.0%. Despite the decrease in fertilizer prices, capacity utilization levels remained high in 2009 due to a shortage of fertilizer globally. In addition, agriculture sector was more resilient to the economic crisis as the world is already facing a food shortage. Going forward, we assume regional fertilizer capacity utilization rate to increase to 90.0%- 95.0% by 2012. Feedstock Prices Natural gas is the main feedstock for fertilizer sector and crude oil prices are used as a benchmark to set gas prices in international markets. However, gas prices are highly subsidized in certain regions of the world such as Middle-East, Northern Africa, and South Asia where pre-determined discounts exist which fix the price to US$0.75 per mmbtu (in Saudi Arabia) to US$2.5 per mmbtu (North Africa and South Asia). Average gas prices in international markets shot up by 79.5% from US$4.4 per mmbtu in 2001 to US$7.9 per mmbtu in 2008, due to higher average crude oil prices YoY. Crude oil price have recovered in 2Q-2009 and 3Q-2009 after falling by more than 50.0% in 3Q-2008. In view of the rise in oil prices in 2Q-2009 and 3Q-2009, we have changed our forecast for crude oil prices from US$60.0-65.0 to US$70.0-80.0 per barrel for the period 2009-12. Consequently, we have also revised international gas prices to US$4.0-5.0 per mmbtu during 2009-12. Saudi Basic Industries Corporation 5
Chart 05: Gas & Crude Oil Prices 100.0 95.0 90.0 85.0 80.0 75.0 70.0 65.0 60.0 9.0 8.0 7.0 6.0 5.0 4.0 55.0 2006 2007 2008 2009E 2010E 2011E 2012E 3.0 Crude Oil Prices (US$ per barrel) Gas Prices (US$ per mmbtu) Source: OPEC, EIA & Global Research Products Prices The upward revision in forecasted crude oil prices has led to an upward revision of 5.0%- 10.0% of prices of petrochemical and fertilizer during 2009-12. Chart 06: Basic Petrochemical & Fertilizer Products Prices (US$ per ton) 1,700 1,500 1,300 1,100 900 700 1,550 1,350 1,150 950 750 550 350 500 150 3Q08A 4Q08A 1Q09A 2Q09A 3Q09A 4Q09E 1Q10E 2Q10E 3Q10E 4Q10E 1Q11E 2Q11E 3Q11E 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E Source: OPEC, EIA & Global Research Ethylene Propylene Ammonia Urea 6 Saudi Basic Industries Corporation
Saudi Basic Industries Corporation Updated Financial Outlook New Complexes & Expansion Plans Despite the uncertain economic environment, SABIC is consistently expanding its operational and production activities. Recently, SABIC announced two JVs with SINOPEC and Albemarle Corporation. SINOPEC will have a production capacity of 3.2mn tons of different petrochemical products and is expected to come on line in 1Q2010. Albemarle Corporation will have a production capacity of 6,000 tons of tri-ethylene aluminum (TEA), and is expected to come online in 2012. JV with SINOPEC is likely to give SABIC the ability overcome entry barriers and deal with competition effectively in the Chinese market. In addition, tie-up with a local producer will give the company the necessary support and knowledge to sail smoothly in the high growth Chinese market. The Chinese JV will increase the overall capacity of the company by 2.8%. Chart 07: Overall Company s Production & Growth 78,500 68,500 11.5% 9.6% 58,500 0.4% 5.0% 48,500 4.9% 38,500 28,500 18,500 3.0% 0.9% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 8,500 2006A 2007A 2008A 2009E 2010E 2011E 2012E Production (000 tons) Growth Source: Company Annual Accounts, Press Release, Zawya & Global Research 0.0% Going forward, we believe that the company capacity utilization will grow modestly to reach 77.0%-82.0% in 2012 compared to 60.0%-65.0% in 2009 due to an expected slow pace of economic recovery. Sales Revenue Based on the improvement in product prices and capacity utilization during 3Q2009, the company is expected to post sales revenue of SR99.5bn in 2009, which is 1.6% higher than our previous forecast. We have updated crude oil prices, capacity utilization and commencement dates of new capacities in 2010. We have also incorporated the delay in YASNAB plant which is not expected to come online in 2009. We now expect sales revenue to increase at a CAGR of 3.3% during 2009-12 against our previous estimate of negative CAGR of 1.5% during the same period. Saudi Basic Industries Corporation 7
Chart 08: Sales Revenue (SR mn) 200,000 16.2% 180,000 160,000 19.5% 14.2% 30.3% 140,000 46.2% 120,000-34.0% 100,000 10.3% 80,000 60,000 40,000 20,000-2006A 2007A 2008A 2009E 2010E 2011E 2012E Sales Revenue (SR mn) Growth Source: Company Annual Accounts, & Global Research 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% CGS & Gross Margins The company is expected to record cost of sales of SR62.3bn as compared to our previous estimate of SR71.3bn. The expected 2009 gross margin now is 27.0% as compared to our previous estimate of 27.2%. We have also lowered our 2009 EBITDA margin estimate to 30.3% from 32.0% due to upward revision in administration costs to SR8.9bn from our previous estimate of 8.7bn and decline in other income estimate by 31.1% to SR1.8bn from our previous estimate. Going forward, gross margins are expected to show improvement and remain in the range of 30.0%-33.0% during 2009-12 due to higher end-product prices and utilization levels. Chart 09: Gross & EBITDA Margins 43.0% 41.0% 39.0% 37.0% 35.0% 33.0% 31.0% 29.0% 27.0% 25.0% 2006A 2007A 2008A 2009E 2010E 2011E 2012E Gross Margin - LHS EBITDA Margin - RHS Source: Company Annual Accounts, & Global Research 46.0% 44.0% 42.0% 40.0% 38.0% 36.0% 34.0% 32.0% 30.0% Profitability Growth Despite the upward revision in sales revenue for 2009, we expect the company to post profitability of SR7.6bn in 2009, a downward revision by SR3.3bn from our previous estimate. The major reasons for such a downward revision are (i) downward revision in other income by SR0.8bn from our previous estimate (ii) expected higher depreciation, which has pushed up our cost of sales estimate by SR1.3bn, (iii) higher minority interest to SR7.1bn from previous estimate of SR6.6bn, (iv) increase in administration and general expenses estimate by SR0.2bn to SR8.9bn from our previous estimate (v) increase in financial cost to SR3.1bn from our previous estimate of SR3.0bn. 8 Saudi Basic Industries Corporation
Chart 10: Profitability (SR mn) & ROAA 30,000 25,000 20,000 15,000 13.4% 12.9% 8.4% 5.9% 6.4% 7.5% 16.0% 14.0% 12.0% 10.0% 8.0% 10,000 5,000 2.7% 6.0% 4.0% 2.0% - 2006A 2007A 2008A 2009E 2010E 2011E 2012E PAT ROAA Source: Annual Reports & Global Research 0.0% Chart 11: Profitability (SR mn) & ROAE 30,000 25,000 30.0% 32.9% 22.7% 17.8% 35.0% 30.0% 20,000 15,000 10,000 7.2% 15.7% 16.2% 25.0% 20.0% 15.0% 10.0% 5,000 5.0% - 2006A 2007A 2008A 2009E 2010E 2011E 2012E PAT ROAE Source: Annual Reports & Global Research 0.0% We now expect profitability to increase at a 2008-12 CAGR of 5.6% as compared to previous estimate of 1.8% for the same period. The major reasons of upward revision in the company s future profitability are (i) improved capacity utilization (ii) higher long term price range from our previous estimate and (ii) commencement of Chinese JV, which is expected to operate at 100.0% utilization levels. The company s ROAA and ROAE are expected remain in the average range of 5.0-6.0% and 14.0%-15.0% during 2009-12. Saudi Basic Industries Corporation 9
Valuation and Recommendation We have used Discounted Cash Flow methodology to value the Company. Under this method, we have used 4-year (FY2009-FY2012) explicit forecast period for the Free Cash Flows (FCF) of SABIC. The terminal value is estimated by using a constant terminal growth rate for the Company. The forecasted cash flow and the terminal value is then discounted at the company Weighted Average Cost of Capital (WACC). In order to value the FCF of SABIC, we have used the following assumptions: 1. Risk Free Rate (RFR) of 5.5%. 2. Equity risk premium of 6.0%. 3. Beta of 1.2 4. A terminal growth rate of 3.0%. 5. A target cost of debt of 7%. Using the above assumptions, we have derived a cost of equity for the company at 12.5% through Capital Assets Pricing Model, and a WACC of 10.7%, resulting in a fair value of SR83.1 per share. Table 04: DCF Calculations (SR Mn) 2009 (E) 2010 (E) 2011 (E) 2012 (E) FCF (2,243) 9,864 14,836 26,310 Discounted Cash Flow (2,187) 8,688 11,804 18,910 Terminal Value 352,118 Primary Value 37,214 Terminal Value (discounted) 253,081 Total Enterprise Value 290,295 Debt (101,623) Add: Investments & Cash Equivalents 52,836 Total Equity Value 241,509 Shares Outstanding (mn) 3,000 Fair Value Per Share 83.1 Source: Global Research Sensitivity Analysis We provide below a sensitivity analysis table, which shows the probable value given different growth rate assumption and WACC. The shaded area represents the most probable outcomes. Table 05: Sensitivity Analysis Terminal Growth Rates 1.5% 2.5% 3.0% 4.5% 5.5% 8.7% 93.7 110.0 120.3 165.9 220.1 9.7% 79.4 91.5 98.9 129.6 162.3 10.7% 68.3 77.6 83.1 105.1 126.7 11.7% 59.4 66.7 71.0 87.4 102.7 12.7% 52.1 58.0 61.4 74.0 85.4 Source: Global Research WACC 10 Saudi Basic Industries Corporation
Key Risk The major risks to our valuation are (i) long-term crude oil prices and (ii) long-term capacity utilization rate. In order to facilitate investors, we have run sensitivity on the company s valuation at different levels of crude oil and capacity utilization with respect to our base assumptions. The following table shows the impact of these two factors on the company s valuation. Table 06: Key Risk Analysis Long-Term Capacity Utilization Long - Term Crude Oil Price Base -25.0% -12.5% Assumption* +12.5% +25.0% -10.0% 34.3 46.5 57.1 70.9 83.1-5.0% 44.8 57.9 70.9 84.0 97.0 Base Assumption** 55.2 69.2 83.1 97.1 111.0 +5.0% 65.6 80.5 95.3 110.1 124.9 +10.0% 76.0 91.8 109.1 123.2 138.9 Source: Global Research *In the range of US$70.0-80.0 per barrel **In the range of 77.0%-80.0% We have incorporated all the recent developments in our financial model. Consequently we have revised our fair value by 10.1% to SR83.1 from SR75.6. The stock at its current market price of SR80.5 (as on 22nd Nov 09) is trading at a discount of 3.2% to its fair value. We, therefore, recommend HOLD for the stock. Saudi Basic Industries Corporation 11
BALANCE SHEET Saudi Basic Industries Corporation (SABIC) SR 000 2006A 2007A 2008A 2009E 2010E 2011E 2012E Current Assets Cash and Equivalent 39,556,764 45,876,795 51,027,586 52,835,846 52,190,471 52,624,008 55,880,202 Account R/A 16,475,589 25,977,943 16,104,204 12,942,990 16,866,001 20,001,203 23,233,514 Inventories 13,658,245 22,305,959 24,359,750 23,081,532 24,365,418 26,204,136 26,502,987 Other R/A & Prepayments 4,283,843 4,144,568 3,963,434 10,067,122 10,167,794 10,269,472 10,372,166 Total Current Assets 73,974,441 98,305,265 95,454,974 98,927,491 103,589,683 109,098,818 115,988,869 Non-Current Assets Investments 3,531,839 6,020,877 8,695,833 7,826,250 8,217,562 8,628,440 9,059,862 Other Non-Current Assets 4,017,915 3,327,361 3,189,915 3,349,411 3,516,881 3,692,725 3,877,362 Total Non-Current Assets 7,549,754 9,348,238 11,885,748 11,175,660 11,734,443 12,321,166 12,937,224 Fixed Assets Plant & Property 79,970,622 123,113,574 141,440,177 158,852,881 184,402,038 197,252,981 210,840,414 Intangible Assets 5,094,003 22,964,004 22,979,090 23,950,854 28,372,380 33,678,212 40,045,210 Total Fixed Assets 85,064,625 146,077,578 164,419,267 182,803,735 212,774,418 230,931,193 250,885,624 Total Assets 166,588,820 253,731,081 271,759,989 292,906,887 328,098,545 352,351,177 379,811,717 Liabilities & Owners Equity Current Liabilities Account P/A 11,065,422 14,965,392 8,261,246 9,357,378 9,137,032 10,309,824 10,797,513 Short-Term Bank Facilities 607,622 1,399,188 1,235,542 1,853,313 2,223,976 2,668,771 3,202,525 Current Portion Of Long-Term Loans 5,521,174 3,272,036 3,053,274 4,418,373 5,302,048 6,362,457 7,634,949 Accrued Liabilities & Provisions 8,529,868 11,660,325 11,244,500 9,357,378 22,842,579 21,478,800 22,576,619 Dividend P/A 2,748,985 618,677 619,882 743,858 892,630 1,071,156 1,285,387 Zakat P/A 1,767,020 2,165,563 2,382,119 2,620,331 2,882,364 3,170,601 Total Current Liabilities 25,724,086 33,682,638 26,580,007 28,112,420 43,018,596 44,773,372 48,667,594 Non-Current Liabilities Long-Term Loans 33,611,628 75,437,595 88,367,462 101,622,581 103,655,033 104,691,583 105,215,041 Other Non-Current Liabilities 6,762,869 10,114,576 10,170,907 11,086,289 12,084,055 13,171,620 13,303,336 Total Non-Current Liabilities 40,374,497 85,552,171 98,538,369 112,708,870 115,739,088 117,863,203 118,518,377 Total Liabilities 66,098,583 119,234,809 125,118,376 140,821,290 158,757,683 162,636,575 167,185,970 Shareholders Equity Share Capital 25,000,000 25,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 Statutory Reserves 11,445,362 12,500,000 14,702,984 14,702,984 14,702,984 14,702,984 14,702,984 Research & Technology Reserves 1,291,691 1,291,691 1,291,691 1,291,691 1,291,691 1,291,691 1,291,691 General Reserves 20,631,558 28,894,705 42,360,940 44,646,541 50,101,541 56,590,088 64,834,409 Retained Earnings 14,514,548 23,467,635 14,576,859 16,861,059 27,769,658 40,745,351 54,484,486 Total Shareholders Equity 72,883,159 91,154,031 102,932,474 107,502,275 123,865,874 143,330,114 165,313,569 Minority Interests 27,607,078 43,342,241 43,709,139 44,583,322 45,474,988 46,384,488 47,312,178 Total Liabilities & Shareholders Equity 166,588,820 253,731,081 271,759,989 292,906,887 328,098,545 352,351,177 379,811,717 Source: Company Annual Accounts & Global Research 12 Saudi Basic Industries Corporation
INCOME STATEMENT Saudi Basic Industries Corporation (SABIC) SR 000 2006A 2007A 2008A 2009E 2010E 2011E 2012E Sales 86,327,862 126,204,404 150,809,596 99,561,463 129,738,466 148,157,058 172,100,105 Cost of Sales (51,415,477) (78,254,228) (105,046,315) (72,673,373) (89,832,097) (100,928,937) (113,413,955) Gross Profit 34,912,385 47,950,176 45,763,281 26,888,090 39,906,369 47,228,121 58,686,150 Impairment of Goodwill - - - (1,181,250) - - - Selling, General & Administrative Expenses (4,026,265) (6,903,653) (9,171,992) (8,925,818) (11,676,462) (13,334,135) (15,489,009) Income From Operations 30,886,120 41,046,523 36,591,289 16,781,022 28,229,907 33,893,985 43,197,140 Other Income 2,552,369 4,230,235 4,544,649 1,760,104 4,175,238 4,209,921 4,470,416 Financial Charges (1,567,042) (2,869,168) (3,800,927) (3,111,992) (2,645,192) (2,705,397) (2,690,358) Profit Before Zakat & Minority Interest 31,871,447 42,407,590 37,335,011 15,429,135 29,759,953 35,398,509 44,977,198 Minority Interest (10,527,505) (13,585,318) (13,905,168) (7,132,119) (10,415,984) (12,389,478) (15,742,019) Profit Before Zakat 21,343,942 28,822,272 23,429,843 8,297,016 19,343,969 23,009,031 29,235,179 Zakat (1,050,000) (1,800,000) (1,400,000) (678,348) (1,160,638) (1,380,542) (1,754,111) Profit After Zakat/Net Income 20,293,942 27,022,272 22,029,843 7,618,668 18,183,331 21,628,489 27,481,068 P& L Appropriation A/C Opening Balance 14,043,717 14,514,548 23,467,635 14,576,859 16,861,059 27,769,658 40,745,351 Dividend (9,750,000) (8,750,000) (10,250,000) (3,047,467) (1,818,333) (2,162,849) (5,496,214) BoD Remuneration (1,400) (1,400) (1,400) (1,400) (1,400) (1,400) (1,400) Transfer to general reserves (3,042,317) (8,263,147) (13,466,235) (2,285,600) (5,454,999) (6,488,547) (8,244,320) Transfer to Statutory reserves (2,029,394) (1,054,638) (2,202,984) - - - - Increased in Capital (5,000,000) - (5,000,000) - - - - Ending Balance 14,514,548 23,467,635 14,576,859 16,861,059 27,769,658 40,745,351 54,484,486 Source: Company Annual Accounts & Global Research Saudi Basic Industries Corporation 13
CASH FLOWS STATEMENT Saudi Basic Industries Corporation (SABIC) SR 000 2006A 2007A 2008A 2009E 2010E 2011E 2012E OPERATING ACTIVITIES Profit Before Zakat 21,343,942 28,822,272 23,429,843 8,297,016 19,343,969 23,009,031 29,235,179 Depreciation & Amortization 6,119,236 7,606,010 10,051,999 10,290,853 13,690,166 15,013,738 15,254,743 Other Operating Activities 10,330,531 12,674,962 12,780,579 8,482,607 8,884,538 10,883,555 13,960,562 Zakat Paid (813,028) (2,001,951) (1,122,928) (678,348) (1,160,638) (1,380,542) (1,754,111) Change in Working Capital (2,245,775) 1,508,245 1,090,352 (2,114,714) 8,344,271 (4,826,026) (1,545,882) Goodwill Impairment Loss - 1,181,250 - - - Net Cash Flow From Operating Activities 34,734,906 48,609,538 46,229,845 25,458,662 49,102,307 42,699,756 55,150,492 INVESTING ACTIVITIES Addition to Property, Plant & Equipment (18,752,640) (30,859,807) (26,595,512) (27,703,556) (39,239,323) (27,864,682) (28,842,176) Investments 2,563,233 (20,635) (1,550,367) 869,583 (391,312) (410,878) (431,422) Other Non-Current Assets (1,033,045) (1,246,557) (524,423) (2,312,510) (4,588,997) (5,481,676) (6,551,634) Other Investing Activities (644,554) (43,683,168) (1,136,307) 1,760,104 4,175,238 4,209,921 4,470,416 Cash Flows From Investing Activities (17,867,006) (75,810,167) (29,806,609) (27,386,378) (40,044,394) (29,547,315) (31,354,816) FINANCING ACTIVITIES Long-Term Financing 9,763,358 39,423,079 12,711,105 14,620,218 2,916,126 2,096,960 1,795,949 Short-Term Financing 255,927 791,566 (163,646) 617,771 370,663 444,795 533,754 Dividend Paid (9,701,643) (8,796,105) (10,281,634) (3,047,467) (1,818,333) (2,162,849) (5,496,214) Minority Interest (5,801,347) 2,102,120 (13,538,269) (8,454,546) (11,171,743) (13,097,810) (17,372,972) Cash Flows From Financing Activities (5,483,705) 33,520,660 (11,272,444) 3,735,976 (9,703,287) (12,718,904) (20,539,482) Increase/Decrease In Cash 11,384,195 6,320,031 5,150,792 1,808,260 (645,375) 433,537 3,256,194 Cash Beginning Balance 28,172,569 39,556,764 45,876,795 51,027,586 52,835,846 52,190,471 52,624,008 Cash Ending Balance 39,556,764 45,876,795 51,027,587 52,835,846 52,190,471 52,624,008 55,880,202 Source: Company Annual Accounts & Global Research 14 Saudi Basic Industries Corporation
FACT SHEET Saudi Basic Industries Corporation (SABIC) 2006A 2007A 2008A 2009E 2010E 2011E 2012E Liquidity Ratios Current Ratio (x) 2.9 2.9 3.6 3.5 2.4 2.4 2.4 Cash Ratio (x) 1.5 1.4 1.9 1.9 1.2 1.2 1.1 Profitability Ratios Gross Margin 40.4% 38.0% 30.3% 27.0% 30.8% 31.9% 34.1% EBITDA Margin 43.4% 40.8% 32.8% 30.3% 34.4% 34.8% 35.5% EBIT Margin 38.7% 35.9% 27.3% 18.6% 25.0% 25.7% 27.7% Net Profit Margin 23.5% 21.4% 14.6% 7.7% 14.0% 14.6% 16.0% ROAE 30.0% 32.9% 22.7% 7.2% 15.7% 16.2% 17.8% ROAA 13.4% 12.9% 8.4% 2.7% 5.9% 6.4% 7.5% Leverage Ratios Debt to Equity (x) 0.46 0.83 0.86 0.95 0.84 0.73 0.64 Debt to Asset 39.5% 51.6% 53.7% 55.6% 48.7% 45.3% 41.9% Liabilities/Total Assets (x) 0.40 0.47 0.46 0.48 0.48 0.46 0.44 Growth Rates Revenue Growth Rate 10.3% 46.2% 19.5% -34.0% 30.3% 14.2% 16.2% Net Income Growth Rate 5.9% 33.2% -18.5% -65.4% 138.7% 18.9% 27.1% Equity Growth Rate 16.9% 25.1% 12.9% 4.4% 15.2% 15.7% 15.3% Total Asset Growth Rate 21.6% 52.3% 7.1% 7.8% 12.0% 7.4% 7.8% Ratios Use for Valuation Number of Shares (mn) 2,500.0 2,500.0 3,000.0 3,000.0 3,000.0 3,000.0 3,000.0 Par value per share (SR) 10.0 10.0 10.0 10.0 10.0 10.0 11.0 BV per share (SR) 29.2 36.5 34.3 35.8 41.3 47.8 55.1 EPS (SR) 6.8 9.0 7.3 2.5 6.1 7.2 9.2 Market Price (SR)* 70.2 132.3 52.5 80.5 80.5 80.5 80.5 Market Cap in (SR Mn) 175,400 330,800 157,500 241,500 241,500 241,500 241,500 EV (SR Mn) 204,535 426,521 194,840 290,287 292,965 293,568 290,835 EV/EBITDA 5.5 8.3 3.9 9.6 6.6 5.7 4.8 P/E Ratio 10.4 14.7 7.1 31.7 13.3 11.2 8.8 P/BV Ratio 2.4 3.6 1.5 2.2 1.9 1.7 1.5 *Historical P/E & P/BV multiples pertain to respective year -end prices, while those for future years are based on closing prices on the Tadawul as of November 22nd 2009. Source: Company Annual Accounts & Global Research Saudi Basic Industries Corporation 15
The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure. Disclosure Checklist Company Saudi Basic Indusrties Corporation Recommendation Hold Ticker 2010.SE (Reuters) SABIC AB (Bloomberg) Price SR80.5 Disclosure 1, 10 1. did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in. 3. makes a market in securities issued by this company. 4. acts as a corporate broker or sponsor to this company. 5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 6. An employee of serves on the board of directors of this company. 7. Within the past year, has managed or co-managed a public offering for this company, for which it received fees. 8. has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. expects to receive or intends to seek compensation for investment banking services from this company in the next three month. 10. Please see special footnote below for other relevant disclosures. Global Research: Equity Ratings Definitions Global Rating Definition Buy Hold Reduce Sell Fair value of the stock is >10% from the current market price Fair value of the stock is between +10% and -10% from the current market price Fair value of the stock is between -10% and -20% from the current market price Fair value of the stock is < -20% from the current market price This material was produced by KSCC ( Global ),a firm regulated by the Central Bank of Kuwait. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Global may, from time to time,to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities ( securities ), perform services for or solicit business from such issuer, and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permitted by applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before this material is published to recipients. Information and opinions contained herein have been compiled or arrived by Global from sources believed to be reliable, but Global has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. Global accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. This document is not to be relied upon or used in substitution for the exercise of independent judgement. Global shall have no responsibility or liability whatsoever in respect of any inaccuracy in or ommission from this or any other document prepared by Global for, or sent by Global to any person and any such person shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this or other such document. Opinions and estimates constitute our judgment and are subject to change without prior notice.past performance is not indicative of future results. This document does not constitute an offer or invitation to subscribe for or purchase any securities, and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distribution may be restricted by law. Persons who receive this report should make themselves aware of and adhere to any such restrictions. By accepting this report you agree to be bound by the foregoing limitations. 16 Saudi Basic Industries Corporation